Compliance


 

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The Sense of Urgency! Pitch

In life insurance sales, it is often important to instill a sense of urgency with a prospect. There are two reasons for this:

  1. People often delay making decisions about topics that are difficult to face, like the need to protect their families at death.
  2. The life insurance professional also has to earn a living.

The Right Way: So long as this part of a frank and honest discussion, then it’s a win-win scenario.  Since there are numerous real life instances of people who put off the decision to buy life insurance only to leave their families in financial distress, if a strong need has been identified then it’s in both parties’ interests to have a candid discussion about the choices the prospect faces:

Your challenge is to prove to the prospect that buying now is best for them and you must be able to offer support and quality reasons why. What will they miss if they wait even one more day? What are the potential opportunities if they go ahead and get started on the program now? Why is it important for them to buy now? In other words, what`s in it for them? Remember…the reason a customer buys your product or service is because of what it can do for them. Tell them.

The Wrong Way: On the other hand, the sense of urgency is often used dishonestly as a technique to rush the prospect into a buying decision regardless of whether it is to that person’s advantage.

For example, I often receive telemarketing calls from electricity suppliers. My home state has recently allowed consumers to shop around for their power suppliers. Penelec remains the electricity provider, providing the power lines and infrastructure, but the consumer may now shop among power suppliers whose rates for the electricity vary. If you choose to switch suppliers, the supplier’s name will appear on your monthly Penelec bill.

The solicitor rarely bothers to identify themselves as a representative of a particular company but attempts to pass himself off as a Penelec representative. The last call I received went like this:

Telemarketer: “Hello. You may recall having received a notice from us that you were eligible to take advantage of an offer to receive a 17% rebate check on your Penelec bill. We show that you haven’t responded to take advantage of the offer.”

Me: “Would I have to change my electric company?”

Telemarketer: “No, you wouldn’t Penelec would remain your provider.”

The telemarketer  is dancing around the fact that he is with an outside company. He is hoping to gloss over this fact until I am enticed by his offer of receiving a rebate check. Then, at the close, he will reveal that fact to me. The purpose of this approach is to gain my trust by virtue of confusing me into believing that he is calling from my current provider.

Once I’m interested and ready to buy, he’ll disclose that I’d have to commit to a long-term contract for variable monthly rates that are not guaranteed to be lower than those under my current supplier. That means that, after the initial 2-month period, the rate could actually be higher than the rate I am currently paying. But I’ll be locked into a one-year contract.

Compounding the dishonesty of that approach is the high pressure sense of urgency pitch:

We mailed you an offer, and you didn’t respond. So we are calling to let you know that this is your last chance to take advantage of our offer.

Snap! principle of  the “this is your last chance” sales pitch:

Any worthwhile offer should stand up to careful consideration and analysis. If you’re being pushed to act now or never, choose the latter.

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Losses as High as 8 Billion

JPMorgan’s shares are down about 20% since the bank announced a $2 billion loss from derivatives trades on May 10

JPMorgan Chase’s originally reported $2 billion loss from bad bets on derivatives has not only continued to climb, but recent market gyrations have exacerbated the situation. Since JPMorgan CEO Jamie Dimon first announced the losing trades on May 10, JPMorgan has lost roughly $30 billion of its market value. Shares of JPMorgan have dropped nearly 20% during that same time period.

As the overall market has worsened, it has cost JPMorgan even more to sell protection against possible bankruptcies on corporate bonds. Over the past two weeks, the cost of providing that protection has jumped by about $1 billion for every $100 billion of protection, which could put JPMorgan’s losses as high as $8 billion. Just a few weeks ago, sources were telling CNNMoney that the losses could be in the $6 billion to $7 billion range.

JPMorgan CEO Jamie Dimon, who is testifying before the Senate Finance Committee, recently said he wouldn’t provide a running tally to the public, making it unlikely to know the real extent of JPMorgan’s losses before the bank reports its second-quarter results in mid-July.

Lack of Risk Controls To Blame

Federal regulator Thomas Curry, Comptroller of the Currency, whose office had 65 on-site examiners at the bank when the losses occurred, blamed the losses from risky bets on “inadequate risk management. Janet Tavakoli, president of Tavakoli Structured Finance states that JPMorgan lacked risk controls:

The real issue here is lack of oversight, reasonable standards and risk control for which Dimon is answerable. It’s not about these particular trades.

It Could Get Worse Yet

One piece of good news for the bank, according to CNNMoney, is that hedge funds and other banks have slowed down their opposing bets – they bet heavily against the bank immediately after JPMorgan disclosed its bet on May 10. Now, several traders and fund managers said investors are in a wait and see mode, since JPMorgan is old news right now, and investors have moved on.

However, several market watchers warn if JPMorgan comes under pressure to unwind its trade, hedge funds may reverse direction and once again drive up those costs and the bank’s related losses.  As Janet Tavakoli, president of Tavakoli Structured Finance, put it:

The thing about derivatives is if you take a huge position, size becomes the problem. If people know you need to liquidate, it hurts you.

With The Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Federal Bureau of Investigation looking into JPMorgan’s trade, the end is not in sight. Stay tuned.

The trading errors that led to a more than $2 billion loss at JPMorgan Chase made national headlines. But what may not be immediately obvious is the impact this may have on the average bank customer.

5 Ways JPMorgan’s Massive Trading Loss Could Affect You:

An article by Money-Rates.com, “5 ways JPMorgan’s troubles may affect you” explains that JPMorgan’s loss could be yours too.

1. Lower Savings and Money Market Rates

When the lending or investment environment is strong enough for banks to put that money to profitable use, they try to attract deposits by offering higher interest rates on deposits. But this kind of news s a reminder of the weakness of the investment environment, and will make your bank less likely to do so.

2. Scaling Back Branches

Bank branches are already a target for bank cost-cutting, as shown by last year’s sale of 195 HSBC branches.  A $2 billion loss will put a damper on JPMorgan’s earnings, and the more earnings come under pressure, the more of this kind of cost-cutting you can expect.

3. Less Free Checking

Banks that are struggling through the investment environment try to raise revenues by charging for services that used to be free, such as checking accounts.

4. New Fees

Last year, Bank of America made an abortive attempt to implement a debit card fee and stirred up a storm of bad publicity, but banks continue to look for new types of fees they can charge, while raising traditional fees, such as checking account fees.

5. Regulatory Change

One positive effect might be to encourage stricter implementation of the Volcker Rule, which is designed to restrict the use of bank deposits for speculative investing, especially now that JPMorgan CEO Jamie Dimon and others who have been lobbying to water down the Volcker Rule have now lost much of their credibility.

Since the average customer has much to lose from high-stakes bank investing, rules to separate such speculative activity from traditional banking operations would benefit customers who depend on products like checking and savings accounts. The Volcker Rule doesn’t go far enough toward reinstating the provisions of the recent Glass Steagall Act and other anti-speculative legislation that the big bank CEOs lobbied Washington to dismantle. Failure to regulate derivatives was another cause of the recent mortgage crisis, whose timeline is shown here.


Troubling Questions

As a follow up to my recent posts on the trading loss at the nation’s biggest bank,  JPMorgan Chase – JPMorgan Chase And The Problem With Self Regulation and JPMorgan Execs Voiced Concerns Over CIO Bets in 2oo7, it’s clear that many of the facts are still not known and there are troubling questions that need to be answered.

Now that the Securities and Exchange Commission and the Federal Bureau of Investigation are looking into ’s JPMorgan Chase’s huge trading loss, serious questions of wrongdoing need to be asked.  And perhaps they will now that shareholders have filed two lawsuits against the bank accusing it and its leaders of taking excessive risk The lawsuits filed in New York charge that JPMorgan changed its risk model without telling investors which led to the losses, and that company leaders misled investors. One suit was filed by California shareholder James Baker. A second was filed by shareholder Arizona-based Saratoga Advantage Trust’s financial services portfolio.

Dealbook implies that there are troubling suspicions of wrongdoing:

The first lesson [of the financial crisis] is that when they are in trouble, banks will mislead the world about their financials. And some will lie. Richard S. Fuld Jr. of Lehman BrothersE. Stanley O’Neal and Charles O. Prince of Citigroup all played down their banks’ exposures before their institutions took vast losses. Were they deliberately misleading? Because of the failures to investigate the financial crisis adequately, we still don’t know.  But we do know that when banks hide their problems, they metastasize and can hurt the economy.

What Did They Really Know?

Questions that will need to be answered include these:

  • What did Jamie Dimon, the bank’s chief executive, and Doug Braunstein, the chief financial officer, know and when did they know it?
  • Were JPMorgan’s first-quarter earnings accurate?
  • Were top JPMorgan officials misleading when they discussed the chief investment office’s investments?
  • Why did JPMorgan change a crucial measure of risk during the first quarter. Was that adequately disclosed?

In other words, before discussing reform, the first question should be whether any existing laws were broken. According to Dealbook:

That it hasn’t been asked shows how little true accountability there has been since the financial crisis. No top-tier banker has gone to prison for the many bank failures, the deceptive sales practices or the misrepresentations of the books. As a society, we have thrown up our hands at Too Big to Prosecute financial fraud.

What Were They Hiding?

Although JPMorgan fired the three top executives responsible for the trading loss, we still don’t know much about the timing of these losses. The  trades first came to pubilc awareness in early April, 2012, when Bloomberg News and The Wall Street Journal wrote about the “London Whale.” When JPMorgan reported its first-quarter earnings on April 13, Dimon and Braunstein downplayed problem, which Jamie Dimon called  “complete tempest in a teapot.” Really?

The inconsistency here is that, while he dismissed concerns then, now the bank says that the big losses in fact happened after the first quarter, in late April and early May. They were clearly executing a damage control strategy worried that, had they admitted the extent of the problem, the losses could have multiplied as investors might have forced JPMorgan to give up its positions at “fire-sale prices.” The bluff didn’t work.

Answers Needed

From the losses that have been reported so far, the underlying value of the derivatives contracts was likely $250 billion to $300 billion, and we still don’t know what were these trades were, when the losses occurred and whether the positions were being marked correctly.  The one big “London Whale Trade” — buying and selling credit default swaps on the same index but at different expiration dates — appears to amount to only $50 billion or $70 billion, and likely accounts for only $600 million to $1 billion of the $2 – $5 billion loss.

The trades had been initiated months ago and were widely known, and, as Dealbook points out, earlier in 2012, bank insiders reported that

“Mr. Iksil was ‘defending his positions,’ implying that he was doubling down to force the market in the opposite direction. That’s a rookie trading mistake, one presumably approved by his bosses.”

Still No Accountability for Dimon?

So far CEO and Chairman Jamie Dimon has somehow managed to sweet talk his way through the debacle, trading in on his charm.  He spent all of four minutes talking about the trading loss and steps the company has taken to address it, and two more talking about accomplishments of the company over the past year. After offering a quick apology to shareholders, he survived a push to strip him of the title of chairman of the board, which he simultaneously holds with the CEO title. The vote to strip him of the chairman’s title won only 40% support. Experts in corporate governance believe that the dual role is abusive.

Also passed was a shareholder endorsement of his pay package from last year, totaling $23 million,  with 91% of the vote, according to an Associated Press analysis of regulatory filings.  Of course, most of the shareholder ballots were cast in the weeks before Dimon revealed the trading loss.  He has received the same amount, in addition to a $17 million bonus,  for two years straight.

When confronted at the meeting by shareholders upset about the trading loss, he was not very expansive in his answers. Reportedly, to some questions, he offered a simple, “OK, thank you.” According to the Register Guard:

The Rev. Seamus Finn, representing shareholders from the Catholic organization Missionary Oblates of Mary Immaculate, said that investors had heard Dimon apologize before for the foreclosure crisis and other problems.

“We heard the same refrain: We have learned from our mistakes. This will never be allowed to happen again,” Finn said. “I can’t help wondering if you are listening.”

One wonders: are answers like these worth $23 million dollars? And just what does it take for a powerful CEO to be held accountable these days?  Even the president’s response to these risky derivative trades that Dimon himself admits should never have been made was muted. On  the television show The View, all he said was: “JPMorgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion.”

As Robert Reich points out:

Not a word about Jamie Dimon’s tireless campaign to eviscerate the Dodd-Frank financial reform bill; his loud and repeated charge that the Street’s near meltdown in 2008 didn’t warrant more financial regulation; his leadership of Wall Street’s brazen lobbying campaign to delay the Volcker Rule under Dodd-Frank, which is still delayed; and his efforts to make that rule meaningless by widening a loophole allowing banks to use commercial deposits to “hedge” (that is, make offsetting bets) their derivative trades.

Nor any mention of Dimon’s outrageous flaunting of Dodd-Frank and of the Volcker Rule by setting up a special division in the bank to make huge (and hugely profitable, when the bets paid off) derivative trades disguised as hedges.

Nor Dimon’s dual role as both chairman and CEO of JPMorgan (frowned on by experts in corporate governance) for which he collected a whopping $23 million this year, and $23 million in 2010 and 2011 in addition to a $17 million bonus.

Wall Street’s biggest banks were too big to fail before the bailout. Now, led by JPMorgan Chase, they’re even bigger. Twenty years ago, the 10 largest banks on the Street held 10 percent of America’s total bank assets. Now they hold over 70 percent.

Regulatory Conflicts of Interest

In the meantime,  the loss of at least $2 billion in trading practices similar to those that caused the 2008 financial meltdown again illustrates the need for meaningful financial reform.  Jamie Dimon is a director at the Federal Reserve Bank of New York, and has used this position to become the leading voice against regulation of Wall Street. As the Federal Reserve is currently working on crafting and implementing some of the most important aspects of the 2010 financial reform bill, voices are calling for  Jamie Dimon to resign from the Federal Reserve Bank of New York.

You can sign the petition here.

Related Links

Snap! principle of corporate accountability:
Accountability is for little people.

Risk Management at JPMorganIn “JPMorgan Chase and the Problem With Self Regulation,” I wrote about  the vital role that regulatory compliance plays in keeping the economic sector strong and stable. Self regulation is problem-ridden, and strong regulatory oversight is required to keep the economy running.

More information is emerging about some of the problems that result from an internally-driven compliance mindset. According to ComplianceXDealbook reported that as early as 2007, top JPMorgan execs expressed their concerns over the activities of the bank’s chief investment office in London, which is said to have cause the $2 – $5 billion loss reported Thursday, May 10, 2o12.

Failure to Supervise

Apparently, a schism between the bank’s headquarters in New York and the London chief investment office may have been one of the causes of the lack of oversight that might have prevented massive loss. Part of the breakdown in supervision, current executives said, was a fundamental disconnect between the chief investment office in London and the rest of the bank. Even within the chief investment office there were heightening concerns that the bets being made in London were incredibly complex and not fully understood by management in New York.

Achilles Macris, head of the CIO, ignored concerns from the unit’s internal risk manager in 2009. Some said that Doug Braunstein, who became the bank’s chief financial officer in 2010, tolerated a too-high level of risk and was too cozy with Macris, as the pair had worked closely together in the past.  After concerns were raised about positions assembled by Bruno Iksil, now known as the London Whale, Macris brought in Braunstein, as risk officer. CIO Ina R. Drew has stepped down, and Mr. Macris, who failed to heed concerns as early as 2009, is also expected to resign.  Mr. Macris, is said to have had wide latitude as well as Ms. Drew’s support. Apparently, since risk officers are empowered to stop trades considered too risky, the coziness of the arrangement generated talk in New York as well.

Dealbook states:

In the years leading up to JPMorgan Chase’s $2 billion trading loss, risk managers and some senior investment bankers raised concerns that the bank was making increasingly large investments involving complex trades that were hard to understand. But even as the size of the bets climbed steadily, these former employees say, their concerns about the dangers were ignored or dismissed.

An increased appetite for such trades had the approval of the upper echelons of the bank, including Jamie Dimon, the chief executive, current and former employees said. Initially, this led to sharply higher investment profits, but they said it also contributed to the bank’s lowering its guard. “There was a lopsided situation, between really risky positions and relatively weaker risk managers,” said a former trader with the chief investment office.

Alarms Ignored

Several factors may explain why Mr. Dimon, who is known for his ability to sense risk failed in this instance and failed to heed the first alarm bells that were sounded in early April.

First,  the scope of the chief investment’s office’s trades are said to have increased sharply following the acquisition of Washington Mutual during the financial crisis in 2008. WaMu owned riskier securities that needed to be hedged against, which caused the business’s investment securities portfolio to quadruple to $356 billion in 2011, from $76.5 billion in 2007.  Mr. Dimon was also distracted by gigantic losses from bad mortgages, and new regulations threatening the profitability of traditional banking.

When erratic trading sessions in late March resulted in big gains one day, followed by bigger losses the next on the London trading desk of the bank’s chief investment office, Ms. Drew and her team persuaded Jamie Dimon that the turbulence was manageable. After first-quarter earnings were reported on April 13, the erratic trading pattern continued. Still, no one on the operating committee questioned Ms. Drew’s conclusion, or were even advised of the scope of the problem until days before Mr. Dimon went public with the loss.

Expect An Expanded Role for Compliance

While there is a lot of blame to go around, the Compliance failure is egregious.  Whatever the new regulations coming out of Washington will look like, it’s clear that Compliance will need to take a more active and empowered role in banking.

Thanks to Beth Connolly,s Editor-in-Chief of the Wall Street Job Report and the Compliance Exchange. She blogs creatively at When Nutmeg Met Basil. Connect with her on LinkedIn Twitter, andAbout.Me.

Strengthening the Understanding of the Vital Role of Regulation and Compliance

JPMorgan Chase was regarded as having sound accounting practices. That is until they disclosed a $2 – $5 billion loss based on risky transactions involving synthetic credit securities, or hedges.  To put this in perspective, it cost JPMorgan nearly 10 percent of its stock price.

So what are synthetic credit securities? Bloomberg Business Week defines them as “derivatives that generate gains and losses tied to credit performance without the owner buying or selling actual debt.” In other words,  betting on the direction of the economy. As Sen. Carl Levin (D-Mich.) explained, this is more evidence that what banks call ‘hedges’ are often actually “risky bets that so-called ‘too big to fail’ banks have no business making.”

So, despite the meltdown of 2008 caused by the very same derivatives, big banks continue to take risks that imperil the entire economy leaving taxpayers, employees and consumers on the hook.

Now A Criminal Probe

Appropriately, the Securities and Exchange Commission has launched an investigation into the bank’s accounting and disclosure practices, as is the Federal reserve, and the Justice Department through the FBI’s New York office, according to Reuters.  An investigation by the FBI means JPMorgan is now in the midst of a criminal probe.

The investigations are appropriate because this bad bet wasn’t due to a trader gone rogue as with UBS. Since all the JPM people who should have known about the big bet on corporate debt knew about it, the ouster of the bank’s Chief  Investment Officer Ina Drew and others were inevitable. Drew, a 30-year veteran of JPM, apparently volunteered her resignation weeks befire as it became apparent that the trades were losing money. We can also expect resignations from, among others, Achilles Macris, head of the CIO, who ignored concerns from the unit’s internal risk manager in 2009 and Doug Braunstein, who, as Chief Financial Officer since 2010, tolerated a too-high level of risk,

The Disconnect Between Word and Deed

JPMorgan Chase was supposedly a well-run self regulated bank. Then why did CEO Dimon lobby so hard to erode proposed banking regulations created after the 2008 financial collapse  that was precipitated by exactly the same kind of risky and secretive deal-making that resulted in JPMorgan’s incredible loss? Why did he blame excessive regulation for banking woes, and hold that the Volcker rule, designed to prevent financial institutions from taking risks with federally insured deposits, would only make things worse?

You might say that JPM violated the proposed Volcker Rule, but it has yet to be written. and Jamie Dimon’s lobbying efforts can be held largely responsible for the fact that we have a regulatory system that only reacts when it’s too late.

According to the Star Ledger, Democratic Senate candidate Elizabeth Warren of Massachusetts called on Dimon to resign from New York’s Federal Reserve Board, from which he could presumably advise banking regulators how best to regulate his bank, a clear conflict of interest.

It’s Not The Politics Stupid!

Will this loss strengthen the argument for stronger controls when the decision about how to interpret the Volcker rule is made in July? Will legislators finally be prepared to stand up to the financial lobby?

I wouldn’t bet on it.

It’s important to remember what got us here. Another banking giant, Sandy Weil of Citibank, succeeded in convincing a Republican Congress and Democratic President (Clinton) that what was left of Glass Steagall needed to be completely dismantled. This also coincided with ongoing organized efforts to establish “corporate personhood” across the country, via an agenda of judicial activism that was originally initiated by Supreme Court Justice Lewis Powell on behalf of the Tobacco Industry and continues to this day.

Partisan Republicans and Democrats may point fingers at one another, with calls by just about every politician on the Hill for more regulation, as well as the president. However, the causes are neither partisan nor even political per se.

How A Judicial Activist Agenda Led to Today’s Debacle

Although both 1972 Nixon-appointed Supreme Court justices Powell and William Rehnquist were conservatives, the principled Rehnquist resisted Powell’s radical corporatist views. From Alter Net a brief background of the under-the-radar agenda that got us where we are today:

Despite the Rehnquist dissents, Powell’s vision of an unregulated corporate political “marketplace,” where corporations are freed by activist courts from the policy judgment of the majority of people, won out. Powell, of course, could not have…moved a majority of the Court to create corporate rights if no one had listened to his advice to organize corporate political power to demand corporate rights. Listen they did — with the help of just the sort of massive corporate funding that Powell proposed.

Corporations and corporate executives funded a wave of new “legal foundations” in the 1970s. These legal foundations were intended to drive into every court and public body in the land the same radical message, repeated over and over again, until the bizarre began to sound normal: corporations are persons with constitutional rights against which the laws of the people must fall.

Huge corporations, including Powell’s Philip Morris, invested millions of dollars in the Chamber of Commerce’s National Chamber Litigation Center and other legal foundations to bring litigation demanding new corporate rights. In rapid succession, corporations and supporters funded the Pacific Legal Foundation, the Mid-Atlantic Legal Foundation, the Mid-America Legal Foundation, the Great Plains Legal Foundation (Landmark Legal Foundation), the Washington Legal Foundation, the Northeastern Legal Foundation, the New England Legal Foundation, the Southeastern Legal Foundation, the Capital Legal Center, the National Legal Center for the Public Interest, and many others.

These foundations began filing brief after brief challenging state and federal laws across the country, pounding away at the themes of corporations as “persons,” “speakers” and holders of constitutional rights. Reading their briefs, one might think that the most powerful, richest corporations in the history of the world were some beleaguered minority fighting to overcome oppression. The foundations and the corporate lawyers argued that “corporations are persons” with the “liberty secured to all persons.” They used new phrases like “corporate speech,” the “rights of corporate speakers,” and “the corporate character of the speaker.” They demanded, as if to end an unjust silence, “the right of corporations to be heard” and “the rights of corporations to speak out.”

The results of endowing corporations more rights than individuals is not just restricted to the kind of damage shown in the video below. It has resulted in economic devastation that imperils taxpayers, employees and consumers. The analogy to this video is that the economic fortunes of the middle class are going up in smoke as the effects of unbridled corporate irresponsibility trickle down.

The Fox In the Henhouse

The rest, as they say, is history. In the current presidential election, there is a limited choice between a Powell-ite Republican, and a finger-in-the-dike Democrat, both of whom rely on the funding and council of the financial sector, and the same can be said of the gridlocked legislature. Rounding this out, judicial activism leaves little hope for an end to the policies that put the fox in the hen house, leading to greater income polarization, reduced economic opportunities and a weakened economy. And the corporate financial sector, as demonstrated by JPMorgan Chase and the SROs (the SEC and FINRA) does not do a proper job of policing itself. All of which means that the economy is at the mercy of individuals like Jamie Dimon.

A Time for Regulatory Compliance

In the months ahead, you’ll be reading a lot of opinion about the JPMorgan Chase debacle. The majority of it will be meaningless reporting. A good portion of it will be partisan propaganda. Hopefully, a very small part will shed some light on the real issues about the vital role that regulatory compliance plays in keeping the economic sector strong and stable.

Related:

The 2008 economic meltdown was the subject of a recent Frontline special “Inside the Meltdown” that explains how the 2008 meltdown unfolded.

Snap! principle of regulatory compliance:

Compliance is not the enemy – it’s the white blood cells in the body of the economy.